Question

Calculate the contribution to total performance from currency, country, and stock selection for the manager in the example below. All exchange rates are expressed as units of foreign currency that can be purchased with 1 U.S. dollar. (Do not round intermediate calculations. Round your answers to 2 decimal places. Input all amounts as positive values.) EAFE Weight Return on Equity Index E1/E0 Manager's Weight Manager's Return Europe 0.6 15 % 1 0.6 12 % Australasia 0.3 16 1.4 0.1 17 Far East 0.1 20 1.2 0.3 17

Answer 1

Answer:

A. Currency selection 4% loss relative to EAFE

B. Country Selection 1.80% loss relative to EAFE

C. Stock Selection -2.6%loss relative to EAFE

Explanation:

Calculation to determine the contribution to total performance from currency, country, and stock selection for the manager in the

A. Calculation for CURRENCY SELECTION

Using this formula

EAFE / Manager weight * Currency appreciation ( E1 / E0 - 1 )

Let plug in the formula

EAFE =[ 0.6 * ( 1 - 1 ) ] + [ 0.3 * ( 1.4 - 1 ) ] + [ 0.1 * ( 1.2- 1 ) ]

EAFE= 0+0.12+0.02

EAFE=14%

Manager =[ 0.6 * ( 1- 1 ) ] + [ 0.1 * ( 1.4 - 1 ) ] + [ 0.3 * ( 1.2- 1 ) ]

Manager=0+0.04+0.06

Manager=10%

Loss relative to EAFE=(10%-14%)

Loss relative to EAFE=4%

4% loss relative to EAFE

B. Calculation for COUNTRY SELECTION

Using this formula

EAFE/ Manager weight × Return on Equity Index

Let plug in the formula

EAFE = [ 0.6 * 15% + 0.3 * 16% + 0.1* 20% ]

EAFE = 0.09+0.048+0.02

EAFE = 15.8%

Manager = [ 0.6 * 12% + 0.1 * 17% + 0.3 * 17% ] Manager =0.072+0.017+0.051

Manager =14%

Loss relative to EAFE=15.8%-14%

Loss relative to EAFE=1.80%

1.80% loss relative to EAFE

C. Calculation for STOCK SELECTION

Using this formula

Stock Selection=( Manager’s return - Return on Equity Index ) × Manager weight

Let plug in the formula

Stock Selection=[ ( 12% - 15% ) * 0.6 ] + [ ( 17% - 16% ) * 0.1 ] + [ ( 17% - 20% ) * 0.3 ]

Stock Selection=-0.018+0.001+-0.009

Stock Selection=-2.6%

-2.6% loss relative to EAFE